ECON-200 Chapter Notes - Chapter 4: Purchasing Power Parity, American Cheese, Hyperinflation
22 Dec 2020
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The rate at which a person can trade the goods and services of one country for those of another. If a pound of swiss cheese costs twice as much as american cheese, the real exchange rate= pound of swiss cheese/pound of american cheese. We can use real exchange rates to combine differences in prices and differences in goods. If a bushel of american rice is and a bushel of japan rice is 16,000 yen (first we have to use the nominal exchange rate to convert prices) If its 80yen/dollar, then the american rice would be 8,000yen a bushel. (half as expensive as japan) The exchange rate is bushel of japan rice/bushel of american rice. Real exchange rate= nominal exchange rate * domestic price. The overall real exchange rate between the u. s. and other countries is . Real exchange rate= (e x p)/ p* (u. s. basket= p, price index for a foreign basket=p*, nominal exchange rate between countries=
